Option Activity Alert: F, TOL, BRCD

F – Ford Motor Co. – The automaker’s shares edged 2.45% lower this afternoon to $15.80, but investors expecting to see Ford rebound and rally in the next few months initiated bullish plays using put and call options expiring in February 2011. It looks like one trader purchased a bull call spread, while another investor put on a bullish risk reversal. The call spreader picked up 5,000 contracts at the February 2011 $16 strike for a premium of $1.24 each, and sold the same number of calls at the higher February 2011 $20 strike for a premium of $0.20 apiece. Net premium paid to establish the spread amounts to $1.04 per contract. Thus, the responsible party is prepared to make money should shares in Ford Motor Co. surge 7.85% over the current price of $15.80 to surpass the effective breakeven point at $17.04 by February expiration. The call-spreader could end up walking away with maximum potential profits of $2.96 per contract if Ford’s shares jump 26.6% to trade above $20.00 by expiration day next year. The other bullish play in the February 2011 contract appears to be the work of an investor selling 1,990 February 2011 $15 strike puts at a premium of $0.69 each in order to purchase the same number of February 2011 $18 strike calls for a premium of $0.50 a-pop. The transaction results in a net credit of $0.19 per contract, which the investor keeps as long as shares in Ford exceed $15.00 through expiration. Additional profits start to accrue for the trader should shares rally 13.9% to trade above $18.00 before the contracts expire. The net credit received by the investor provides limited downside protection should shares continue to head south. The investor will face losses, however, if Ford’s shares trade below the effective breakeven price of $14.81 in the next few months to expiration.

TOL – Toll Brothers, Inc. – The homebuilding firm’s shares fell 2.4% to an intraday low of $17.35 this morning, but regained composure this afternoon to rally as much as 1.35% to an intraday high of $18.02 by 3:15 pm in New York trading. Toll Brothers joined the ranks of our ‘hot by options volume’ market scanner today on heavier than usual action in near-term call options. Investors may be building up bullish positions on the stock ahead of TOL’s fourth-quarter earnings report, scheduled for release ahead of the opening bell on December 2, 2010. December $18 strike calls were far-and-away the most popular contracts, with more than 15,800 lots changing hands at that strike versus previously existing open interest of 11,722 contracts. The majority of the December $18 strike calls, at least 9,300 of them, were purchased for an average premium of $0.48 per contract. Call buyers are prepared to make money should TOL’s shares exceed the average breakeven price of $18.48 ahead of December expiration. Bullish sentiment on the homebuilder spread to the higher December $19 strike where another 1,500 call options were purchased at an average premium of $0.21 a-pop. The jump in demand for call options on Toll Brothers and the firm’s impending earnings announcement helped lift the overall reading of options implied volatility on the stock 17.3% to 36.94% as of 3:20 pm.

BRCD – Brocade Communications Systems, Inc. – Shares of the biggest maker of switches for data-storage networks took a beating today, falling as much as 10.0% to touch an intraday low of $5.13 after the firm released lower-than-expected forecasts for sales and earnings in the first quarter. Brocade Communications Systems reported fourth-quarter earnings after the final bell on Monday, posting net income of $0.05 a share, which is down from earnings of $0.07 a share in the same period last year. The San Jose, CA-based firm projected first-quarter profits of $0.09 to $0.10 a share on revenue of $550 million, disappointing analysts expecting Brocade to earn $0.14 a share on sales of $556.9 million, on average. The earnings forecast and sharp pullback in the price of the underlying spurred demand for options on the stock today. Yet, it does not appear that activity in BRCD options is solely the work of pessimistic players. Investors betting that shares are unlikely to slide much lower in the next five months looked to the April 2011 $5.0 strike to sell approximately 11,300 puts at an average premium of $0.41 per contract. Put sellers keep the full premium received on the transaction as long as shares in Brocade Communications exceed $5.00 through expiration day in April. Investors employing this strategy appear ready and willing to have shares of the underlying stock put to them at an effective price of $4.59 apiece should the puts land in-the-money by expiration. The switch maker’s shares have managed to remain above their 52-week low of $4.64 since August 25, 2010, and have not dipped below $5.00 since September 1, 2010. Options implied volatility on Brocade is down 20.0% at 40.36% following earnings.

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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